A Step in the Right Direction

Trump has released his first budget proposal.  It is the most radical budget proposal ever offered by a president in the last seven million years…give or take.  The reactions are predictable…and curious.

First, the predictable: in no way, shape or form will the budget finally authorized by congress look anything like this. 

Some of President Trump’s best friends in Congress sharply criticized his first budget Thursday, with defense hawks saying the proposed hike in Pentagon spending wasn’t big enough, while rural conservatives and others attacked plans to cut a wide range of federal agencies and programs.

Not enough spending, congress says.  Tell me something new.

Now, the curious.  What else can be said of the budget?  There are a lot of bad things in it.  Increased military spending and building a wall come to mind.  Whoop-de-do.  A president of the United States proposes increased spending. 

I'm shocked, shocked to find that increased spending is going on in here!

We see such a reaction from Reason’s Nick Gillespie:

The blueprint, which doesn't engage with entitlements such as Medicare and Social Security and other forms of "mandatory" spending at all, simply balances cuts to various parts of the government with increases to the Departments of Defense and Homeland Security…. Overall federal spending will still come in around $4 trillion.

A minarchist would suggest that about $500 billion could do.  Me?  Zero.

Let's call this what it is: Unacceptable.

Every budget proposed by every president is “unacceptable” – do we just keep recycling, once a year, the same editorial?

No reductions to Social Security or Medicare.  I get it.  Federal spending is unsustainable at some point with these two programs as they are.  But today isn’t that day. 

For those who hope for rationality from a government unconstrained by honest money, I will suggest: get off of that turnip truck.  There is only one thing that will change the trajectory of federal spending: loss of appetite for US Treasuries. 

On the other hand, Trump gets something right; the first president in my lifetime to get it.  There are only two ways to cut spending: actually cut spending (and not merely reduce the rate of growth) and eliminate programs.  Trump proposes just this:

Washington (CNN) — President Donald Trump unveiled his first budget blueprint on Thursday, and to offset increases in defense spending, the President is proposing $54 billion in cuts to large parts of the federal government and popular programs big and small.

Trump's budget would cut off funding entirely for several agencies, including arts, public broadcasting and development groups, and also proposes steep cuts to agencies like the State Department and Environmental Protection Agency.

Virtually every agency will see some sort of cut, with only Defense, Homeland Security and Veterans Affairs getting a boost.

Certainly, I would prefer cuts to Defense and Homeland Security while leaving these peripheral programs untouched, but it is something: significant cuts to last fiscal year’s budget for close to a dozen departments; about thirty programs eliminated.

Look, I get it.  as significant a deviation as this proposed budget is, it is all just tinkering around the edges; in the long run, irrelevant.  But it cannot be denied that Trump has proposed a budget like no other. 

At least (and at most) it will start a discussion.  A discussion that has never been held before inside the beltway.

God Give Us More Jokers

There is always Joker to see through the delusion.

― Jostein Gaarder

Delusion: a false belief or opinion.

Same old same old every day

if things don't change you're just gonna rot

Cause if you do what you've always done

you'll always get what you always got

Uh could that be nothin'

-        Aerosmith

Delusion: Psychiatry. A fixed false belief that is resistant to reason or confrontation with actual fact.

With that as foundation…

A Six-Point Plan to Restore Economic Growth and Prosperity, By John Mauldin and Stephen Moore

Mauldin and Moore offer their prescription for economic growth, via this op-ed for the Investor’s Business Daily.  I probably would not have bothered to comment, except that Stephen Moore represents (I think, but I am not sure) the “freedom” position in the Dream Debate of the Century (as Paul Krugman represents the other half of this mainstream-allowable festival of freedom). 

Introducing the characters: why jokers, and why delusion?  Let me explain….

Austrians, and their close cousins the libertarians, are considered jokers; living in a land of utopia, liquidationists, don’t they know the world is full of bad guys, it has never worked anywhere before, blah, blah, blah.

The delusionists?  Anyone who believes that playing with the fringes of the current system will change anything; further delusional, that anything meaningful can change within the current system.  This has been tried before, and failed spectacularly every time.

David Stockman, Jim Grant, and Peter Schiff can be considered jokers; call Mauldin and Moore delusional.

For me, it is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring.

― Carl Sagan

From the op-ed:

The dismal news of 0.2% GDP growth for the first quarter only confirmed that the US is in the midst of its slowest recovery in half a century from an economic crisis.

The two of us have met with several [presidential] candidates and discussed tax reform and other economic growth issues. We offer here some solutions of our own for them to consider.

The authors offer their prescription for a cure.  In this will be found the delusion.

First:

Streamline the federal bureaucracy…. The president, with some flexibility, should require each agency to reduce the number of regulations under its purview by 20%, at the rate of 5% a year.

In the history of the United States government, such a thing has never come close to happening.  Take the Federal Register:

…the Federal Register is the official daily publication for rules, proposed rules, and notices of Federal agencies and organizations, as well as executive orders and other presidential documents.

Go ahead and click on any one day of any one month of any one year.  Get an eyeful.  Not only does the Federal Register increase daily, it is increasing at an increasing rate. 

Ten Times Worse Than RadioShack

Updated 8 February, 2015

David Stockman has written a very thorough piece on the condition of the economy – specifically the amount of debt and the impact that the debt has on inflating many things, including asset prices and favored economic indicators, specifically GDP.

I would like to focus on one aspect of his commentary – and it starts right at the top:

Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.

The implied 2.9X global leverage ratio is daunting in itself.

Keep that ratio, 2.9X, in mind.

In most cases, when people speak of debt leverage ratios, they are considering debt relative to earnings or cash flow, or debt relative to assets or equity.

Comparing debt to GDP would be similar – to the extent GDP means anything (which Stockman does an excellent job later in the post of demonstrating it means little) – to comparing debt to the revenue of a company.

This is where RadioShack comes in:

RadioShack Corp. filed for Chapter 11 bankruptcy protection in the face of mounting losses, according to media reports late Thursday.

The company filed bankruptcy.

What was the RadioShack debt to revenue ratio before this cataclysmic event?  For 2013, the revenue was $3.4 billion; the debt was $614 million.  This makes the ratio 0.2X.  The debt grew significantly in 2014 – by over $200 million – pushing the ratio to somewhere around 0.3X.

Remember, the global balance sheet is levered ten times as much, at 2.9X. 

Not a fair comparison, you say?  RadioShack was a sickly company, not healthy and vibrant like the global economy?  (Don’t write to me about the “healthy and vibrant” comment; just work with me.)  It could never carry the debt load that a healthy, cash-flow-positive company could carry, you exclaim!

OK, I’ll bite.

What about 3M?  About 0.2X.

Caterpillar?  0.7X.

Exxon Mobil?  0.06X.

How about JPMorgan?  11.0X!!!!!

So many statements can be made from this simple analysis, probably none of them terribly earth-shattering.  First, globally debt is high – at a ratio 10 times as high as the now-bankrupt RadioShack.  Second, the leverage is in the banks – no big surprise, I know.  But what is the purpose of banks other than to fund productive assets?  Why should banks be so highly leveraged?

We know in today’s Ponzi-financed world that banks are not limited to funding productive assets.  With unlimited access to and free supply of cost-of-goods-sold and a backstop of government and central bank largesse, why would banks self-limit their leverage?  Of course, they don’t.

What about so-called national, or sovereign, debt ratios?  It is easy to find the ratio of government debt to GDP, but – despite the many efforts to make it so – not all GDP is available to the government to service the debt.  What about debt as a ratio to revenue – meaning tax and other receipts?

Putting together data from a couple of sources – government debt as of 2012, and government revenues of various years (2011-2014) – for countries with more than $1 trillion in outstanding debt I come up with the following ratios for debt to tax revenues:

United States - 5.9X

Japan - 5.7X

China - 1.8X

Germany - 1.7X

Italy - 2.3X

France - 1.5X

United Kingdom - 1.4X

Brazil - 1.4X

Spain - 2.3X

Canada - 1.8X

All somewhere from 5X to 20X worse than RadioShack, with the two worst offenders being the two countries whose currencies have, in the last several decades, been in most demand globally.

Back to global debt: productive assets carry a debt-to-revenue ratio of well below 1.0X, more like 0.2X.  Globally the debt ratio is 2.9X GDP – with banks and sovereigns well above this international average.  Banks and sovereigns: the two hands that wash each other, creating credit with seeming immunity to failure – thereby securing commodities at a rate far higher than a properly functioning market would allow.

There are a lot of unproductive assets being supported by the global Ponzi.  A peek into the fate of RadioShack will give us some idea of the fate of this hypothetical global company:

Shares of the 94-year-old consumer electronics chain were delisted by the New York Stock Exchange earlier in the week.

Delisted.  What might that look like on a global scale?  This is precisely what the central-bankers have been working so hard to hide from us, especially since 2007.  

The asset-price bubble will burst – when, I don’t know.  Many assets will be worth exactly zero, or less than zero as the cost to dispose of many assets will be higher than the disposal value.  Rotting buildings, rotting equipment, rotting cities and towns – left to die in place.

But not all assets.  There will remain many productive assets; the holders of these – while they might be nominally worse off (due to the re-pricing of assets) – will at least own things of value, with the ability to generate income.

Those holding the debt of those entities too highly levered (whether banks, sovereigns, or otherwise) will be left holding the bag – an empty bag.

Default Catastrophic?

Yes, according to Erskine Bowles:

If the U.S. hits the debt ceiling and defaults on its obligations, it would be catastrophic not only domestically but around the world, said Erskine Bowles, former co-chair of the president's debt commission and co-founder of the Campaign to Fix the Debt.

You would think the co-founder of an organization called “Campaign to Fix the Debt” might take a different view?

First of all, default is coming one way or another.  The default might take many forms for a time (changes in benefit programs, currency debasement, etc.), but eventually there will be real, no-kidding defaults – the easiest will be for the Fed to write-off the Treasury debt it holds.

Second, catastrophic for whom?  Not the US taxpayers.  Not those being spied upon.  Not those being killed via drone.

"We need to get through these man-made crises" and get to the real issues of reducing the nation's debt, Bowles said Wednesday on CNBC's "Squawk Box."

A great way to reduce the nation’s debt (for those who speak in such terms) is to default.  It certainly is the most moral way.

The cost of the first government shutdown in 17 years is running about $12.5 million an hour or $300 million a day, according to economic-consulting firm IHS Global Insight.

Only a bureaucratic state could figure out how to have not doing anything actually cost money….

Some shutdown.

Color me Confused

Joe Salerno has written an article entitled “The Flipside of the Trillion Dollar Coin.”  From the first time I read the article, I have struggled with many of his conclusions and statements – both on monetary issues, as well as political issues.  You can see a small taste of my confusion in the comments section, for example, Salerno’s comments as basis for my initial question at the site:

When new money is injected into the economy via open market operations, as it is today, it expands bank reserves….In contrast, when the Treasury creates money it does so by writing checks for bureaucrats’ salaries, for entitlement payments, and to pay vendors for government purchases.

I thank vikingvista for patience in replying; however I remain unsettled regarding his replies.  As most (but not all) other comments seemed to be supportive of Salerno’s views, I have decided not to clog the thread up further with my confusion.

Additionally, I struggle with Salerno’s political conclusions as well, for example:

Last but not least, as an adjunct of the Treasury, the Fed would no longer function as bailer-outer of last resort…. A partisan Treasury under the watchful eye of the congressional opposition and in full view of the public will have to make these decisions.

In my ongoing struggle with many of the statements in this article, I have decided that the initial question (as well as follow-on questions) I asked at the Mises site, as well as the political point raised above are of secondary importance.  I will come to address these later in this article, however I would like first to focus on these two points made by Salerno that most color me confused:

Thus, at a given level of government spending, siphoning off resources from the private economy via deficits financed by money creation is no worse than extracting them through taxation….As outlandish as the idea of the $1 trillion platinum coin at first appears, it gives us a glimpse of a monetary arrangement that, although far from ideal, is superior to the current system.

I am confused by both parts of this: 1) between these two alternatives, I believe the method that government uses to extract resources does matter, with money creation being worse than taxation, and 2) if offering for the dollar relatively more credibility is of value, the realities of politics would make this system inferior, not superior.

The system that is behind the idea of the trillion dollar coin is one of money creation from nothing, just as the Fed does today, but with two twists: a) not brought on via debt, and b) controlled by the Treasury Department as opposed to a supposedly independent central bank. Salerno is arguing that inflation (of a slightly different sort than that which exists today) is better than deficits paid for or financed with actual production.

Many propose this today (most famously Ellen Brown), and I have always viewed it as a step in the wrong direction from current methods (although it would likely bring down the dollar even faster, if that is what you like).  Salerno is suggesting it is a step in the right direction, a system “superior to the current system.”  I am reeling….